Emerging Markets Face Financial Turmoil

Eurozone breathes sigh of relief. Italy is once again in a state of political chaos after the Italian president blocked the formation of a populist government over the proposed appointment of a euro-skeptic minister of the economy. In the past, such political turmoil would weigh on the euro, but because it could lead to a technocratic government instead of an anti-EU one, the euro was having its best day in two months in early trading on Monday.

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- The gains to the U.S. dollar and the ongoing tightening of interest rates has raised some concern about the burden of debt in emerging markets.

- EM debt is also three times as high as it was in 2007, rising to $63.4 trillion last year.

- But Bloomberg Opinion argues that EM countries are better positioned to weather pressure on their currencies. Foreign-exchange reserves for the largest 12 emerging market countries, excluding China, exceeds $3.2 trillion, up from $2.85 trillion in 2014.

- Still, with currencies under assault in Argentina and Turkey, among other countries, financial markets are on edge.

Krugman: Emerging market financial crisis possible. In a series of tweets, famed economist Paul Krugman said a currency/financial crisis from emerging markets looks possible, similar to the 1997-98 Asian financial crisis. He said higher corporate debt in emerging markets, much of it denominated in foreign currencies, could blow up if local currencies depreciate. That would spark a vicious cycle in which deteriorating economic conditions weaken currencies further, making debt all the more painful. He said such a scenario isn’t necessarily likely, only that there are some worrying signs.

Turkish lira rebounds. The Turkish lira rebounded on Monday after the country’s central bank introduced changes to simplify monetary policy. After plunging by more than 20 percent against the dollar over the past two months, the lira rose 3.3 percent in early trading on Monday. Last week the lira touched a low as President Recep Tayyip Erdogan opposed higher interest rates. But the central bank unveiled changes to soothe the market. “It seems the orthodox economists are winning in Turkey, first with a 300 bps rate hike, now a realistic repo rate,” Charles Robertson, global chief economist at Renaissance Capital, told the FT. Related: Four Tips From The World’s Top Investors

Trump proposes auto tariffs; Mexico and Canada dig in. President Trump has asked his Commerce Department to look into the possibility of 25 percent tariffs on imported vehicles, but because it would likely be highly damaging to U.S. industries, most analysts view it as bluster amid NAFTA negotiations. For their part, the governments of Canada and Mexico said they wouldn’t be bullied into submission. “Mexico is not going to negotiate on the basis of pressure, Mexico is very clear about what works and what doesn’t work for us,” said Eduardo Sanchez, a spokesman for Mexico’s president.

Commodities

Gold falls again on renewed North Korea summit. Gold prices rose sharply last week after President Trump cancelled his summit with North Korea’s Kim Jong Un and less-than-hawkish signals from the Fed. The central bank’s Wednesday meeting seemed to suggest rate tightening would not accelerate beyond the current path. Gold jumped above $1,300 per ounce on the news. However, gold fell back in recent days after Trump said the North Korea summit could remain on track.

China tells state companies to buy American soy. China’s government agreed to instruct its state-owned companies to step up purchases of American soybeans, a concession made to President Trump to help reduce the U.S. trade deficit with China. Soy prices jumped on the news last week. But in reality, it is unclear if Chinese companies will do so since American soy is more expensive than soy from Brazil, for instance.

U.S. steel quotas could be worse than tariffs. The U.S. has granted exemptions from steel tariffs to some countries, including Brazil, Australia, Argentina and South Korea, in exchange for quotas. South Korea, for example, “agreed to quotas restricting its steel sales to the United States by 30 percent,” Reuters reports. The EU, Canada and Mexico could receive similar deals. Some analysts think that non-exempt countries that have to pay the 25 percent tariff could actually end up better off.

Energy

Oil prices crash on potential increase in OPEC/non-OPEC production. Late last week, news broke that Russia and Saudi Arabia were inching closer to loosening the oil production agreement, potentially opening the flood gates to up to 800,000 bpd of additional supply. Oil prices crashed on the news, falling more than 3 percent on Friday and falling another 2 percent in early trading on Monday.

Exxon, Chevron evacuate Gulf of Mexico workers as Alberto approaches. With Subtropical Storm Alberto approaching, ExxonMobil (NYSE: XOM) evacuated personnel from its Lena production platform. Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX)shut production on platforms. The Gulf of Mexico produces 17 percent of the entire country’s oil and 5 percent of its natural gas. Alberto is the first named storm of the 2018 hurricane season.

Gasoline prices at highest in four years. U.S. retail gasoline prices hit their highest level in four years just ahead of the Memorial Day weekend. National prices for regular gasoline are sitting just shy of $3 per gallon, averaging $2.96 per gallon. Still, prices have either peaked, or will likely soon hit a peak, and could soon decline. Refinery maintenance is ending and, more importantly, crude oil prices have declined sharply in the last few days.

Cryptocurrencies

U.S. DOJ looks into Bitcoin price manipulation. The U.S. Department of Justice has launched a criminal investigation into whether traders are manipulating the price of Bitcoin and other digital currencies. The probe is looking at illegal trading practices, including spoofing and flooding the market with fake orders, according to Bloomberg. Bitcoin plunged on the news of the investigation last week.

Ethereum drops 14 percent overnight. Cryptocurrencies plunged on Monday, with Ethereum falling by 14 percent before regaining some ground, although it was still off by nearly 7 percent in early trading. Bitcoin has also been on a downward trajectory since early May, dipping to just over $7,200 as of Monday, down from almost $10,000 a few weeks ago.

South Korea bans crypto trading in 11 countries. South Korea has banned the trading of cryptocurrencies in 11 countries over money laundering concerns. Transactions from residents in these countries, who are listed on the Non-Cooperative Countries and Territories blacklist, will be blocked. The countries include North Korea, Bosnia and Herzegovina, Ethiopia, Syria, Iran, Iraq, Sri Lanka, Trinidad and Tobago, Tunisia, Vanuatu and Yemen.

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